I've done lots of research on this. I have a general partner who has been non-passive since the business inception. If I'm understanding right, since he was non-passive within the last 5 years, he can't be passive now, but then how does that ever change if that's the case? I'm also understanding that a "limited partner" MUST be passive, so we could change that way maybe? Any thoughts?
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Can you give us some more details? -
This is an LLC and all members as of now are listed as "managing members" but I can change that on the annual report with the SOS. If this partner isn't working there now, and wants to avoid SE on his part, can we change that income to passive?
Now, I've read a different thread that makes me think that none of the distibutive share of income is SE, becuase it's an LLC, which seems totally unreasonable since these people really work there.Comment
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Perhaps my clarification wasn't enough. I'm basically trying to figure out if one partner can be changed to passive that was non passive before or do I need to change him to limited? I'm aware of the "material particiapation" but if they don't materially participate in 2009 can I just change it on the K-1 or does he need to become limited?Comment
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I'm thinking in terms of the formerly active , one of three "managing members", had a stroke/
heart attach and therefore is no longer active; something like that.
I think it's possible to do this, however I would want to see the Operating agreement properly amended so you could have a copy of the amendment for your files. (in addition to the original one!)ChEAr$,
Harlan Lunsford, EA n LAComment
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I agree with Harlan.
The client needs to do the formalities, it is not something to just be done on the tax return. He probably is both, passive and limited, but my knowledge on this issue is fuzzy. I would need to read up to give a qualified opinion.
The following link might give you some more guidance:
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I can ammend the articles on the state annual report. Can I just show him as not a 'Managing Member' but leave him as a general partner and show his income is passive and avoid SE or must he be changed to 'Limited' requiring a structure change with my state since he has been non-passive in previous years?Comment
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That sounds more like a state issue in addition to the change of the Operating Agreement. He surely is not a "General Partner", which is a Partnership term and indicates unlimited liability.
As far as SE tax is concerned, you probably have good grounds for not having him pay it, but there is anything but clarity on this issue.
Bees Knees gave an excellent summary on this subject some weeks ago when I brought up this issue. Have you seen this?Comment
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woke up
I woke up at 4:00 and it dawned on me that a LLC by statute has limited members (partners only) and maybe just the wrong box on the filing forms were marked. If this is the case I just would mark the correct box now.
Maybe the same is true for being active/passive? If the original Operating Agreement is clear about him being a passive partner then it's just a formality on the filing forms.Comment
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